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Euro-Area Economy Headed for 2-Year Slump

EC lowers forecast; now predicts 0.4% decline in GDP in 2013.

The euro-area economy will shrink more than previously expected in 2013 as part of a two-year slump that has pushed up unemployment to a record, the European Commission said in new forecasts today.

Gross domestic product in the 17-nation region will fall 0.4 percent this year, compared with a February prediction of a 0.3 percent, the Brussels-based commission said today. This follows a 0.6 percent contraction in 2012 and shows the region headed for its first ever back-to-back years of falling output.

France, now projected to shrink 0.1 percent instead of growing by the same amount, joined seven other euro-area economies expected to contract this year. Growth across the currency bloc will return too slowly to reduce unemployment, as the euro area remains dependent on exports to offset the impact of the sovereign debt crisis and banking woes, the EU said.

“In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe,” said EU Economic and Monetary Affairs Commissioner Olli Rehn. He called for the EU to undertake “structural reforms” to bring back jobs and said budget consolidation will continue at a slower pace.

Unemployment is expected to climb to 12.2 percent in 2013, up from 11.4 percent last year. An “increasing labor-market mismatch” will keep the jobless rate high in the medium term and bodes poorly for those who have been out of work for extended periods, according to the EU report.

The European Central Bank yesterday lowered its key interest rate to a record low, the first rate cut since July last year. Policy makers meeting in Bratislava lowered the main refinancing rate to 0.5 percent from 0.75 percent, taking the ECB closer to exhausting its conventional policy tools.

Falling interest rates for the EU as a whole have “not yet fed through to the real economy,” the commission said. It also flagged risks that growth could be even lower than currently projected if nations slow their structural reforms, if extra budget cuts further damp output or if the euro appreciates and hurts exports.

The euro was higher against the U.S. dollar, trading at $1.3128 at 11:23 a.m. in Brussels, up 0.5 percent on the day.

Five euro-area nations have so far sought international aid during a financial crisis that has left 19.2 million workers without jobs and required trillions of euros in financial-sector assistance. The euro area’s response has focused on lowering national debts and strengthening banking regulation, a strategy endorsed in today’s forecasts.

High Unemployment

“High unemployment points to the need for continuing the course in structural reforms,” said Marco Buti, head of the commission’s economics department. “The reduction in fiscal deficits is making headway in a differentiated way.”

At the same time, “intolerably high unemployment in vulnerable member states gives cause for a great concern,” Buti said. The commission’s forecast projects that unemployment will stabilize at high levels in the medium term, with a 12.1 percent forecast for next year.

The euro-area growth outlook for 2014 has become more muted, with a forecast of 1.2 percent growth, down from a February prediction of 1.4 percent.

The commission cut its forecast for the German economy, Europe’s largest, to 0.4 percent growth this year, down from 0.5 percent.

France joins the Netherlands, Italy, Spain, Portugal, Greece, Cyprus and Slovenia as headed for contraction in the new forecast. The Cypriot economy is now expected to shrink 8.7 percent, down from a prior estimate of 3.5 percent, in the wake of a euro-area bailout agreement that forced heavy losses on account-holders at the country’s two largest banks.

Across the 27-nation EU, GDP is now expected to shrink 0.1 percent in 2013, compared to a February forecast of 0.1 percent growth. In 2014, the EU expects 1.4 percent growth, down from a prior estimate of 1.6 percent. EU-wide unemployment is projected at 11.1 percent this year and next.

The euro area as a whole is expected to post a budget deficit of 2.9 percent in 2013, according to the EU report. France, where President Francois Hollande has tussled with EU calls for more austerity, is projected to post a 3.9 percent deficit in 2013 and a 4.2 percent gap in 2014, assuming no changes from current policies.

Spain is projected to show a 6.5 percent deficit in 2013. The Spanish economy is now projected to shrink 1.5 percent in 2013, down from a previous forecast of 1.4 percent, with unemployment rising to 27 percent. Greece faces the same expected level of 2013 unemployment, accompanied by a 4.2 percent GDP decline that was improved slightly from a prior forecast of a 4.4 percent fall.

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